Excerpt:civil - fiduciary position of partner - section 51 proviso clause (c) of code of civil procedure, 1908 - accounting partner receives money on behalf of himself an all other partners - decree against such accounting partner when firm dissolved - there is no fiduciary relationship between himself and all other partners in regard to every transaction and act of his - held, decree against the accounting partner not enforceable. - cantonments act[c.a. no. 41/2006]. section 346 & cantonment fund (servants rules, 1937, rules 13, 14 & 15: [h.l. gokhale, ag. cj, p.v. hardas, naresh h. patil, r.m. borde & r.m. savant, jj] jurisdiction of school tribunal constituted under maharashtra employees of private schools (conditions of service) regulations act, (3 of 1978) held, school run by the.....r.n. gurtu, j. 1. this is an appeal by the judgment debtor.2. an application for execution of the decree by arrest and detention, in the civil prison, of the judgment debtor appellant was made by the decree-holder respondent. the decree was for a little over rs. 20,000/-. it was passed in a suit for accounts of a dissolved partnership which had existed between the parties to the decree. the decree-holder invoked section 51 c.p.c. and alleged that the decree was for a sum for which the judgment debtor was bound, in a fiduciary capacity, to account and that, therefore, he could be detained in the civil prison under sub-clause (c) of the proviso to that section.3. the court below directed a warrant of arrest to be issued against the judgment debtor as prayed for by the decreeholder. it held.....

Judgment:

R.N. Gurtu, J.

1. This is an appeal by the judgment debtor.

2. An application for execution of the decree by arrest and detention, in the civil prison, of the judgment debtor appellant was made by the decree-holder respondent. The decree was for a little over Rs. 20,000/-. It was passed in a suit for accounts of a dissolved partnership which had existed between the parties to the decree. The decree-holder invoked Section 51 C.P.C. and alleged that the decree was for a sum for which the judgment debtor was bound, in a fiduciary capacity, to account and that, therefore, he could be detained in the civil prison under Sub-clause (c) of the proviso to that section.

3. The court below directed a warrant of arrest to be issued against the judgment debtor as prayed for by the decreeholder. It held that the finding of the court which had passed the decree was that more money was due from the judgment debtor, the accounting partner, than the latter was prepared to admit and that even after the date of dissolution of partnership the judgment debtor, (accounting partner) had not kept a cash balance safe for payment to the decreeholder partner. The court below also held that the partnership was dissolved on 10-12-1952 and on that date Rs. 8,810/13/3 were held by the judgment debtor as cash balance. Taking the view that the judgment debtor was an accounting party and that the decree was for a sum for which the judgment debtor was bound, in a fiduciary capacity, to account, the said court held that the condition laid down in Sub-clause (c) of the proviso to Section 51 C.P.C. was fulfilled.

4. No oral evidence was led by the parties in this execution case and they merely relied upon the affidavits filed in the case. The judgment of the court, whose decree was under execution is not on the record of this execution appeal. Para 2 of the affidavit of the decreeholder runs as follows:--

The order of the court below does not seem to rest on the allegations made in the affidavit of the decree holder and denied in the judgment debtor's affidavit, which we have quoted above, but rests upon the findings recorded by the court which passed the decree under execution.

6. Before us, the contention, on behalf of the defendant appellant, has been that the judgment debtor, who was a partner of the dissolved firm, did not stand in any fiduciary capacity to account to the decree-holder partner and that, therefore, Sub-clause (c) to the proviso of Section 51, C.P.C. was not attracted. We have, therefore, to examine whether a partner stands in a fiduciary capacity to the other partner or not.

7. In this connection, we will first examine the relevant provisions of the Indian Partnership Act (Act IX) of 1932. The nature of 'partnership' there is defined by Section 4 as being 'the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all'. That relationship arises from contract and not from status (See Section 5). Subject to contract between the partners, every partner has a right to take part in the conduct of the business (Section 12(a)) and the property of the firm shall be held and used by the partners exclusively for the purposes of the business (Section 15) and the personal profits earned by partners from any transaction of the partnership, or from the use of the property or 'business connections' have to be accounted for to the partnership and if any partner carries on any business of the same nature, he shall have to account for the profits (Section 16), When a partnership is dissolved, accounts have to be settled (see Section 48) and any personal profits made thereafter are to be accounted for in the same way as under Section 16.

8. Inasmuch as the relationship of partner arises under a contract, the rights and liabilities arising under the Partnership Act may, in cases where indicated in the Act itself, be varied by agreement between the parties. In this case, on the execution file, we have not got the agreement of partnership and we may, therefore, proceed upon the basis that the relationship of the parties wag governed by the Partnership Act. Section 9 of the said Act states that:--

'Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative.'

We will now refer to the Indian Trusts Act which has been relied upon by the court below. Section 88 thereof runs as follows:--

'Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to thoseof such other persons and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.'

Illustrations.

(a) A, an executor, buys at an .undervalue from B, a legatee, his claim under the will. B is ignorant of the value of the bequest. A must hold for the benefit of B the difference between the price and value, (i) A, a partner, buys land in his own name with funds belonging to the partnership, A holds such, land for the benefit of the partnership.'

9. Thus under the Trusts Act a partner availing himself of a fiduciary character and gaining for himself a pecuniary advantage, holds such advantage for the partnership,

10. We will now refer to some cases which have been cited before us with a view to examine whether the liability to account between one partner and the other springs from a -fiduciary relationship.

11. In Cassels v. Stewart, (1881) 6 AC 64 the facts were these:--

A prosperous company came to consist of three partners, A, B, and C. having equal shares. The contract of co-partnership contained, inter alia, a clause that it should not be in the power of any of the partners to assign all or any part o their shares or interest in the capital, stock, or profits of the concern to any person or persons, or give them a right to inspect the company's book, or to interfere in any way with the business; and should any such assignation be granted the same was declared of no effect so far as regards the company. There was also a clause that on the retirement of a partner the remaining partners should have power to buy his interest at the amount standing to his credit as the last balance. A entered into an agreement by which he sold to B his whole interest. A's name remained on the books, and he signed all deeds relating to the business till his death seven years after, C was not till then informed of the agreement. He then claimed to participate on the grounds of (1) an alleged mandate to B to purchase for the company A's interest; (2) that the agreement could only be legally made under the contract of co-partnership with his consent; and (3) that B had secretly acquired a benefit for himself within the scope of the partnership business.

The decision of the court below was affirmed by the House of Lords and it was held that, in point of fact, no agreement, had been made between B and C to the effect that B was to buy A's interest for the partnership. And in respect to the articles of co-partnership, they did not prevent the agreement being made, and otherwise it was perfectly legal. Therefore G was not held entitled to any benefit under it.

12. The question in that case was whether C was not entitled to the benefit of the purchase made by B of A's interest and, in that connection, the relationship of partners was discussed. The contention was that B stood as a partner in a fiduciary relationship with C and, therefore, he was entitled to any benefits which accrued from theagreement between A and B to B. The House of Lords, referring to the case of Featherstenhaugh v. Fenwick, (1810) 17 Ves 298, and other cases of that sort observed as follows:--

'Those cases proceed upon the ground that a partner being an agent (for I think it is because he is an agent that the fiduciary character arises), if he, as an agent, makes a profit out of the concerns of his principal, he cannot make a profit out of his principal's business for himself, As I have said, a partner is an agent, and the principle applying to him is a branch of that general rule which applies to agents.

I agree with what has been said by both the noble and learned Lords who have spoken before me, that that is of necessity confined to those cases where it is part of the business of the company or firm that is carried on and I think it is quite impossible to say that the purchase of a partner's beneficial interest in the partners' share in the partnership was one of those things in which the business of the company was carried on, and in which, therefore, Mr. Stewart may be considered as in the nature of an agent for that class of dealings for Mr. Cassels,' Lord Blackburn, from whose judgment the aforesaid passage is quoted, then proceeded to consider the special terms of the contract between the partners in that case.

13. In Plowright v. Lambert, (1885) 52 LT 646, there are certain observations in regard to what is a fiduciary relationship which it would be profitable to quote. That case is, however, not one of partnership but was a case of vendor and purchaser where the setting aside of a sale was involved, the vendor's condition being embarrassed, the price being inadequate and there being concealment of value. In that connection, what was a 'fiduciary relationship' came to be discussed: Examining the relationship between the parties to the transaction, Field J. observed as follows:--

''Therefore there existed, with regard to that, a relation of trustee and cestui quo trust. In that respect the case somewhat resembles a case which was cited to me of Denton v. Donnei, (1856) 23 Beav. 285, and as it contains also a very clear statement of the law applicable to the matter, I will give the short effect of that case. I need not say it is familiar to everybody who practises in this division that the fiduciary relation as it is called, does not depend upon any particular circumstances. It exists in almost every shape. It exists, of course, notoriously in the case of trustee and cestui quo trust; it exists in the case of guardian and ward, of parent and child, of solicitor and client. Indeed, the recent decision of Tate v. Williamson, (1866) 15 LT (N. S.) 549; 2 Ch. AC 55 has gone so far as to say that it also may be created voluntarily, as it were, by a person voluntarily coming into a state of confidential relation with another by offering to give advice in a matter, and so being disabled thereafter from purchasing. Therefore, although the case of (1856) 23 Beav 285 (ubi sup) arose between solicitor and client, of course, no reliance is to be placed upon that except so far as the doctrine is common to all relations of confidence and trust..,.....'

'One partner receiving assets of the partnership an account of himself and his co-partners, is not liable to imprisonment under Section 4, Sub-section 3, of the Debtors Act, 1869, as a person acting in a fiduciary capacity.'

In that case, (1894-1 Ch. 343) an application was made for a writ of attachment for making default in payment of a sum of money, which raised the question, whether one partner receiving money on account of himself and his co-partner, received it in a fiduciary capacity, so as to be within the exception contained in Sub-section (3) of Section 4 of the Debtors Act, 1869. It appears that, the plaintiff and defendant had been in partnership as solicitors. The action was one for a dissolution of partnership in which, by an order of the 21st of June, 1893, a receiver had been appointed by consent upon the application of the plaintiff, to receive, collect, and get in outstanding debts and other moneys owing, belongings, payable or which might be paid to the firm of Piddocks and Burt, solicitors.

Then on the 10th of July, 1893, the defendant applied for, and on the 23rd of August obtained, a four day order against the plaintiff for payment by him, to the receiver, of 479 2s. 6d. in his hands belonging to the outstanding partnership estate, or to the clients of the partnership business. After some delay this order was duly served on the plaintiff, but as he failed to comply with it, the defendant now moved that a writ of attachment might issue against the plaintiff for his contempt in not obeying the order of the 23rd August. The larger part of the said sum consisted of rents and other moneys belonging to clients of the form, and admittedly received by the plaintiff in a fiduciary capacity, and the remainder consisted of money received by him on account of costs owing to the partnership, business.

It was contended in that case that what was received on account of partnership business was also received in a fiduciary capacity. The sum involved was a sum received on account of costs. The contention on the other side was that though there wag a liability to account, yet there was no fiduciary relationship between one partner and his co-partners within the meaning of Section 4, Sub-section (3) of the Debtors Act and that the amount for costs did not come within the exception of the statute.

Chitty, J. held that 'The case of a partner was quite different from the case of an auctioneer who stood in a fiduciary capacity with respect to the money produced by the sale of goods entrusted to him. A partner, according to Chitty, J. receives money on account of himself and his co-partners and in receiving such money he was not receiving it in a fiduciary capacity towards the other partners because the law allowed one partner one of the several joint creditors to receive the whole debt on account of the firm to whom it was due. In this view of the matter, Chitty, J. refused the application for a writ of attachment.

14. This case of 1894-1 Ch. 343 (Supra) came to be considered by the Judicial Committee of the Privy Council in Gordon v. Holland; (1913) 108.LT 385, In that case, a member of a partnership, in violation of the express terms of the partnership agreement, without the knowledge of his co-partner, sold land, the property of the partnership, to a bona fide purchaser for value without notice and afterwards repurchased the land from him. The relationship of the partner who had repurchased and as to whether his position was fiduciary thus came to be discussed by the Privy Council and the case of Knox v. Gye, (1872) 5 HLC 656 was referred to where Lord Westhury had laid it down broadly that;--

'To describe the surviving partner as a, trustee for the representative of a deceased partner was a misapplication of language, that there was no fiduciary relation between them and that the right of the deceased partner's representative 'consists in having an account of the property, of its collection and application, and in receiving that portion of the clear balance that accrues to the deceased's share and interest in the partnership.'

Lord Hatherley Lord Chancellor, however, it appears, dissented strongly from the doctrine, as enunciated by Lord Westbury and seems to have laid down that:--

'As all the property of a partnership vests by survivorship in a surviving partner, he, as to the share of that property to which the deceased partner would have been entitled, stands to the representatives of the deceased in the relation of a trustee.'

After referring to the views of Lord Hatherley and Lord Westbury as enunciated in the above mentioned case of (1872) 5 HLC 656 the Judicial Committee there turned to the case of 1894-1 Ch, 843 (supra) and pointed out that, in that case, Chitty, J. seemed to have based his decision on the legal right of one partner as a joint creditor with his fellow partners to receive the whole of any debt due to the partnership, though no doubt liable to account for the sums received, and on this ground, to have distinguished the case from that of Marris v. Ingram, (1879) 41 LT 613: 13 Ch D 338.

The Judicial Committee then pointed out that the case with which they were dealing 1913-108 LT 385 was to be distinguished fundamentally from the facts of both the cases of (1872) 5 HLC 656 and 1894-1 Ch. 343. In that case (1913) 108 LT 385 the sales of lands were from the first illegal and wrongful and were, obviously designed and resorted to in order to enable the partners concerned with the deed to realise the profits and to keep the profits for themselves. The partner, who had repurchased, therefore, was held to be a trustee for the other partners and was not permitted to avail himself of the purchase. In other words, he was held, to be in a fiduciary relationship with the other partners in respect of the particular transaction.

15. The case of 1804-1 Ch. 343 (supra) was again referred to in the case of Rodriguaz V. Speyer Brothers, 1919 AC 59. There a firm carrying on business in London was dissolved on the outbreak of the war with Germany by reason of one of the partners having become an alien enemy, and during the continuance of the war anaction was commenced for a debt alleged to havebecome due to the firm prior to the war, and judgment was signed against the defendant in default of appearance. It was held by a majoritydecision of the House of Lords that the action was maintainable and that the rule which disables an alien enemy from suing in this country does not apply to an action in which, for the purposes of winding up the affairs of a partnership dissolved on the outbreak of war by reason of one of the partners having become an alien enemy, the latter is joined as a co-plaintiff. In this context the position of partners came to be discussed. Lord Aitkinson, in his speech, pointed out as follows:--

'At law the partners are joint tenants of debtsdue to the partnership. In equity they are, as between themselves, treated as tenants in common of such debts. For the purposes of the winding up of the partnership affairs after dissolution each partner is the agent of the others, and thus each stands to the others in a fiduciary relation: (1881) 6 A. C. 64, 77; Hugh Stevenson and Sons Ltd. v. Aktiengesellschaft fur Cartonnagcen Industrie, (1918) AC 239. But in (1872) 5 HLC 656, at p. 675 Lord Westbury lays it down distinctly that a surviving partner is not the trustee of a deceased partner nor of his representatives in the proper sense of that term. And in (1894) 1 Ch. 343 Chitty, J. decided that a partner who receives assets of a partnership on account of himself and his co-partners is not liable to be imprisoned under Section 4, Sub-section (3) of the Debtors Act of 1869 as a person acting in a fiduciary capacity within the meaning of that Statute. That decision has never been reversed or, as far as I am aware, disapproved of.

'Moreover, so little is each partner in the position of a trustee for the firm, or for his copartners, that one member of the partnership is not necessarily precluded from purchasing the share of another in the partnership without the knowledge of the rest of the partners, or from making, on his own account, a purchase not within the scope of, or in rivalry with or injurious to the partnership: (1881) 6 AC 64; Trimble v. Goldberg, (1906) AC 494.

In my view, therefore, the plaintiffs in this common law action cannot be treated as suing as trustees in any proper sense of that word either for the dissolved partnership or for its members or any of them. Neither does their position in any way resemble that of the executors or administrators of a deceased person; who by the grant of probate or letters of administration by the proper Courts, are created representatives of that person, clothed with authority to assert in courts of law not their own rights, but the rights which would have belonged to the deceased person if alive. The plaintiffs are not in this action suing en autre droit. They do not even pretend to do so.'

16. In Corpus Juris Secundum Volume 36under the heading 'Fiduciary Relation' it is stated as follows:--

'It is difficult to define the term 'fiduciary relation'. Under the decisions dealing with meaning of the term, it is a very broad one, but illmay be defined generally as a relation, in which, if a wrong arises, the same remedy exists against the wrongdoer on behalf of the principal as would exist against a trustee on behalf of the cestui que trust. Also referred to as a definition of the term is the statement that a person, in a fiduciary relation to another is under a duty to act for the benefit of the other as to matters, within the scope of the relation. The term connotes a relation of trust as the basis of obligation of one and of security for the other, and implies a condition of superiority of one of the parties over the other......'

'What constitutes a fiduciary relation is often a subject of controversy. The relation may exist under a great variety of circumstances; it exists in all cases where there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing the confidence, in cases when confidence is reposed on one side and there is resulting superiority and influence on the other ...... It hasbeen said, however, that mere respect for the judgment of another or trust in his character is not enough to constitute such a relation, but there must be such circumstances as indicate a just foundation for a belief that in giving advice or presenting arguments one is acting not in his own behalf, but in the interests of the other party'.

17. Again in Corpus Juris Secundum, Vol. 68, para 76 the nature of obligations between partners is so described:--

''Except to the extent that they are regulated by the express contract between them, the status, duties, and obligations of partners as to each other are implied and enforced by law. Generally speaking, the relationship of partnership is fiduciary in character, and imposes on the members of the firm the duty of dealing with one another in the utmost good faith and with respect to partnership affairs.'

In para 88 of the same volume it is stated that a partner who uses the firm property or funds for his own advantage without the consent of the other partners is guilty of misappropriation and will be compelled to account for such property or funds.

18. We will now refer to Chennuru Gavaruraju Chetty v. Chennuru Sitaramamurthy Chetty, AIR 1959 SC 190. In that case the question arose whether the renewal of a lease by one partner necessarily ensured for the benefit of all the partners. It was said that there in a presumption of fact, as distinguished from a presumption of law, that there is an equity in favour of the renewal of the lease ensuring for the benefit of all the partners. But such a presumption being one of fact is rebuttable and must therefore depend upon the facts and circumstances of each case. It was held that the facts and circumstances of that case amply rebutted the presumption of fact that the. lease should ensre to the benefit of all the parties.

In the course of the judgment B. P. Sinha, J. referred to the fact that the partnership stood automatically terminated at the end of the year 1942 and the actual grant of the lease in question was made in April 1943 and pointed out that the plaintiffs would have a cause of action in respect of the renewed lease if their substantive case of continuing the partnership had been established but as that case has failed it was difficult to appreciate how any claim in the renewed lease as an asset of the partnership business could be made. Thereafter follows the observation which has been relied upon by the respondent in this appeal:

'....... the fiduciary character as betweenthe partners had.. ceased on the termination of the original lease and of the partnership business. On such a termination, there was no interest of the partners which the contesting defendants were bound to protect'.

It is urged that their Lordships of the Supreme Court have clear]y laid down that there is a fiduciary relationship between the partners as a matter of law independently of the circumstances of any particular case. We think that this submission is too broadly made.

19. From the examination of the Partnership Act, the Trusts Act and English, Indian and American authorities cited hereinbefore, it would appear that it cannot be said that there is no fiduciary relationship between the partners, although on the basis of the decision in 1894-1 Ch. 343, one partner receiving assets of the partnership on account of himself and his co-partners is not liable as a person acting in a fiduciary capacity. Whether a partner is or is not so acting at any given moment must we think, depend upon the facts.

Merely because he is an accounting party would not straightway establish a fiduciary relationship between himself and all other partners in regard to every transaction and to his acts. The accounting partner receives money on behalf of not only his partner but on his own behalf both constituting the firm and partners are joint tenants of debts due to the partnership under the English common law and in equity they are as between themselves treated as tenants in common of such debts. If a partner, however, is made the Managing partner, because of some special trust which is reposed in him by the other partners, then he may come to hold a position of fiduciary relationshipand if he betrays that trust he may be held accountable as a fiduciary; if the other partners have acted upon his advice because of his special qualifications and disinterested advice is not given and the advising partner gains thereby a personal advantage, then although, as a partner, he is also a co-owner he would be liable on the basis of fiduciary relationship and must give to the partnership such gain.

Likewise, if such a partner made a secret profit utilising his position then also his profit would be the profit of the partnership because in such a case he would be clearly in a fiduciary relationship. In our view, it would have to be shown in each case in regard to the claim made against a partner whether the claim in fact arises out of a partner's fiduciary relationship or is a mere claim arising out of the ordinarycourse of the management of the partnership business, in the course of which management no question of special trust being imposed or any special faith being put on the disinterestedness of advice was involved. We do not think that the Supreme Court case goes to the extent of saying that in every case where a partner is sued for accounts of the partnership, his liability must be considered to be determined on the basis that he is in fiduciary relationship with the other partners.

20. In this case there is no material to ascertain whether the appellant was held liable to account for his statutory duty or for his unfair gains and unconscionable conduct.

21. In the circumstances, we cannot say that in this case it is established that the decree in the previous suit was for a sum for which the judgment-debtor was bound in a fiduciary capacity to account. He was no doubt an accounting party but not necessarily in a fiduciary capacity qua the claim made in the suit in which the decree was passed. We have tried to illustrate in what cases a fiduciary relationship will be involved. We do not think that it is possible to exhaustively lay down when a partner may be said to be liable in a fiduciary capacity to account to the other partner. All that we need say here is that the respondent has failed to show that the appellant was liable in a fiduciary capacity to account to him.

22. This appeal is accordingly allowed with costs on parties to this appeal. The judgment debtor will not be liable to be arrested and detained as ordered by the court below.